Credit Intermediation – Can regulations tango with markets?: Keynote Address by Shri M. Rajeshwar Rao, Deputy Governor, Reserve Bank of India – September 04, 2023 – at the Inaugural Seminar on Banking Regulation, Intermediary Soundness, and System Stability at IIM Kozhikode

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The keynote address by M. Rajeshwar Rao, Deputy Governor, highlights the importance of effective and de-risked credit intermediation in maintaining the soundness of the banking system. He emphasizes that financialization, which refers to the expanding role of financial markets, institutions, and actors in the economy, has been a key enabler of India's economic growth. However, excessive credit growth can lead to systemic instability and undermine financial stability.

Rao emphasizes the need for a robust credit risk management framework to manage credit risk. He discusses the 5M framework, which focuses on measurement, monitoring, managing, mitigating, and migrating credit risk. The Reserve Bank has implemented various initiatives to improve credit risk management, including the development of a secondary loan market, expansion of the type of players in loan markets, and permitting securitization of currently restricted asset classes.

Rao concludes that while risk cannot be avoided, it is essential to know the risks, assess them adequately, and acquire the capabilities to manage them. He acknowledges that some risks must be taken, but it is crucial to strike a balance between taking risks and ensuring financial stability.